Ask influential Europeans the cause of Europe's economic ills, and they are likely to answer "lack of competitiveness". At least that's the answer given last December in the European Commission's important White Paper. But what does the diagnosis mean - and is it correct?

It is not easy to tell by reading the White Paper itself, which defies easy summary. Nonetheless, the thrust of the report is clear. Europe's woes are primarily problems of international competition: "...the role we have come to play in the international division of labour is not an optimum one..." (i.e. competition from low-wage Asian nations is dragging down European living standards).

Is this a reasonable diagnosis? It is certainly appealing: Europe, Japan and the United States are three large corporations struggling for market share. `Europe plc' has failed to match the innovations of its traditional rivals and is threatened by new entrants, whose low labour costs let them engage in aggressive discounting. But be careful: a great continental economic power like the European Union is very different from a corporation, and analogies between corporate competition and international trade can be deeply misleading. There are two important things to watch out for when you hear the word `competitiveness'.

First, beware of hyperbole about the extent to which modern economies depend on global markets. It is true that the average West European nation currently exports about 30% of its output - but most of those exports are to other West European nations! Western Europe as a whole exports only over 10% of its output to the rest of the world (about the same as the United States). By contrast, even the largest corporations sell only a negligible fraction of their output to their own workers and owners: if General Motors were a country, its `exports' (sales to non-GM-affiliated customers) would be more than 250% of its `GDP' (earnings of GM workers and owners). Global interdependence clearly has a long way to go before Europe bears very much resemblance to even the biggest corporations.

Second, remember that there is a qualitative difference between competition within a given industry and trade relations between economic blocs. Coca-Cola and Pepsi are almost purely rivals: only a negligible fraction of Coca-Cola's sales are to Pepsi workers, only a negligible fraction of the goods bought by Coca-Cola workers are Pepsi products. So if Pepsi is successful, it tends to be at Coke's expense. But the major blocs, while they sell products that compete with each other, are also each others' main export markets and each others' main suppliers of useful imports. If the United States does well, it need not be at Europe's expense; if anything, a successful US economy is likely to help Europe by providing it with a larger market and by selling it better and cheaper goods.

The seductive analogy between continental economies and corporations is therefore both quantitatively and qualitatively misleading. At present all three major economic powers are in serious economic difficulty - a fact which itself should cast doubt on the claim that they are locked in some kind of `head to head' competition. The economicdifficulties of each are almost purely domestic in origin and would be no less severe if the other economic powers were less productive or innovative.

Can't the crisis of the industrial world be explained, as the White Paper suggests, by the emergence of new, low-wage competitors in Asia? Here's where it is important to look at the facts. Exports of manufactured goods from rapidly growing Third World countries have certainly grown rapidly: but their imports have grown almost as quickly. Twenty years ago, OECD countries ran a combined surplus in their manufacturing trade with the Third World of about 1% of their combined GDP; today there is a rough balance. Competition from the Third World accounts for, at most, about a one percentage point decline in the share of manufacturing in OECD output -- hardly the devastating impact implied by the White Paper.

Why, then, does the European Union currently have an unemployment rate of more than 11%? The main outlines of an explanation should command a wide consensus. Most of the rise in unemployment in recent years is surely the result of high interest rates, imposed in Germany to counter the inflationary pressures associated with reunification, emulated elsewhere by countries trying to stabilize their currencies against the Deutschmark. Even when the continent is not in recession, however, a high level of unemployment seems to persist in Europe. This is probably due in large part to the disincentives to hiring and working created by Europe's more generous and costly welfare states. The difficulties of the welfare state have been compounded by a technological shift that has reduced demand for less-skilled workers. This shift has led to sharply falling wages -- and surging poverty -- for less-skilled Americans; growing unemployment -- but somewhat less poverty -- for their European counterparts.

Where does international competition figure in this dreary picture? Ask yourself whether Europe's unemployment problem would be alleviated if an earthquake destroyed Japan's high technology base, or if a political upheaval cut China off from world markets. Surely not; which amounts to saying that the supposed problems posed by international competition are essentially irrelevant to the real woes of Europe's economy.

Europe is currently engaged in a painful rethinking of its economic policies, as it turns from daydreams about a glorious future to the troubled present. The White Paper confuses the issue with misleading focus on the alleged problem of `competitiveness'.